Article / 21 November 2012 at 15:08 GMT

EURUSD doesn’t want to go down

John J Hardy John J Hardy
Head of FX Strategy / Saxo Bank
Denmark

What won’t go down must go up? That seems to be the logic of the moment for EURUSD as we await the nature of the news from Greece and as Spanish and other spreads suggest EU mood remains positive

As our Chief Economist Jakobsen pointed out earlier today, there are two ways to read the news that a new Greece deal couldn’t be hammered together overnight. It was either because of differences of opinion among EU leaders and the EU finance ministers or because something larger and more comprehensive is under way. The kneejerk reaction was negative, but on second glance, it appears the market is voting for the latter, especially if we look at the degree Spanish and Portuguese spreads came in today (peripheral yields down, German yields up).

Is the idea that a new OSI deal will be cut to get the Greek debt load on a more sustainable trajectory after the IMF has weighed in and the hard-liner core is forced into retreat for now? And will this mean something more lenient for Spain and Portugal as well in the pipeline? The thought process is interesting as one has to weigh the Euro upside from lower tail risk from potential deal-making against the eventual possibility of some massive ECB bond buying scheme to paper over the losses that must be admitted. Of course, the more the solution leans toward a destruction of the debt and the actual taking of losses at the core with a smaller component of money printing, the more it is Euro-supportive, but let’s see how the eventual solution looks. For now, the market wants to see any solution as Euro positive.

Chart: EURUSD
The key resistance levels held overnight, but they are less likely to hold in the near term now that they are under assault again. So, after the more structural 1.2800/25 area, we would shift the focus to the more local 1.2885 area. If the pair works its way back above that, then we’re effectively on to a full-blown test of 1.3000 and even 1.3170 and significantly higher in the bigger picture if risk appetite comes back into vogue and Obama and the Republicans manage to strike a deal well before year-end. The importance of the downside weekly pivot at 1.2735 was underlined by that level seeing report overnight and this morning.

EURUSD


Brutal JPY move
The themes driving the JPY are well known by now, but as is often the case when a major trend gets under way with a bang, those looking for a pullback have been frustrated and there has been no “good entry point”, so the steepness of the move has been maintained thus far as many are now likely afraid of missing the boat and are selling the JPY at any price. One nominally supportive factor for the JPY was the fact that the trade balance number overnight wasn’t particularly bad given the degree of downside acceleration seen in September. Still, the market feels that it has latched onto a new theme here and the move shows that.

In addition, there is very little in the way of technical resistance on almost any JPY pair. The really major level for USDJPY comes in above 84.00 and not until 111.00+ in EURJPY, etc... If bonds continue sell-off and risk appetite remains rosy for the next few days, it’s hard to see what will put a brake on this move except for exhaustion of selling rather than any buyers being in the market. The IMM report only showed net -30k JPY shorts last Friday (for end of day positions last Tuesday, when USDJPY was still well below 80.00) and if we glance back at 2007, the JPY short position often ran to more than -150k contracts, and USDJPY wasn’t even the big mover of the JPY crosses back then. Something to keep in mind.

BoE Minutes – no one looking?
The BoE minutes were nominally GBP supportive because there was nothing new to suggest imminent fresh easing, but with the focus on the Euro upside, sterling hardly stood a chance of gaining a serious leg up for the moment as it trades as a bit of an anti-Euro. Miles spoiled the MPC vote, taking it to 8-1 the last time around as he voted for more QE.

US Data
The speed of the drop in US claims data is a bit of a positive surprise for the US job market, though we’ll need at least another 3 to 4 weeks to ensure that we are getting out of the post-hurricane effects. Again, all of the good US data (witness yesterday’s massive Housing Starts number, etc..) feeds into the question of whether the US data upside should be good or bad for risk appetite and for the USD – certainly for the USDJPY one would assume that it is supportive.

Limp Aussie
The Aussie continues to trade very weakly and shows that G-10 FX land is becoming far more interesting and far less reliant on the risk on/risk off theme. The strong Euro is likely frustrating complacent EURAUD shorts and the recent news that the RBA is semi-intervening by accumulating foreign currency reserves, as well as keeping a lid on AUDUSD, which has been lost in the doldrums of weak range trading for ages now.

Looking ahead
Remember that this is Thanksgiving week in the US, so markets will be very thinly traded in US hours, even if there is a full trading session today. Tomorrow sees all US markets closed while Friday will only be open for a half session of trading (until 1300 NY time).

Look out for the Chinese HSBC Flash Manufacturing PMI out tonight and the Flash PMI’s for Europe and Germany tomorrow. Canadian retail sales are also up tomorrow and the German IFO is up on Friday.
Stay careful out there.

1y
Rcernava Rcernava
John all true, we saw a plethora of market soothing after the initial let down. A lot can be read into lighter volume flows over Thanksgiving week. Unfortunately, what is Euro positive is not politically expedient. The public is already sick of financing Greece so I can't see a public hair cut, YET. Me thinks the IMF is keeping the heat on FinMins (My guess is IMF demanding PSI and FinMins looking for tricks to get around it). Lets not forget the Catalonia vote is at hand and outcome could drive Spain to call the ECB for some OMT!

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